A Nickel Ain’t Worth A Dime Anymore: The Impact of Inflation on the Law

The recent release of “Star Wars: The Force Awakens” has been casted as one of the most successful movies in American history, but when adjusted for inflation the movie has earned only half of the original “Star Wars” revenue when released in 1977.  “Money illusion” is responsible for this phenomenon that Americans take nominal price over actual value.  This principle is illustrated in Yogi Berra’s famous saying, “A nickel ain’t worth a dime anymore.”  The idea of “money illusion” began in the 1970s with the confusion over nominal wage gains coupled with real purchasing power.  Money illusion as demonstrated by “Star Wars: The Force Awakens” has significant effects on several areas of the law.

The Federal Reserve is responsible for overseeing inflation.  The Federal Reserve has an annual target of a two percent inflation rate, but for the last four years the Federal Reserve has fallen short of that target.  Recently, the Federal Reserve decided to raise short term interest rates to balance inflation and maintainthe continued recovery of the market.

The uncertainty of inflation in the future impacts different areas of the law. Keith S. Rosenn wrote that the impact of inflation on the law “seeps through foundations of law like an acid-bearing water and corrodes much.  Otherwise tightly-drawn contracts become ill-suited to commerce, tort compensation fails to compensate, long-term capital markets dissolve, the tax system warps.”

Inflation also impacts statutes.  For instance, in the 1950s Congress enacted a statute with a liability limit of $500 million on nuclear accidents.  In the 1970s, the Supreme Court later heard a case in which it was argued that the original $500 million limit was unconstitutional because of the period of inflation.  It is unclear if Congress did not predict the problem of inflation or if it would leave such an issue for the courts to decide. This leaves courts in a curious position, should courts update the statutes or decide that the statutes are unenforceable?

The uncertainty of inflation oncourts is also illustrated in the various court approaches to dealing with inflation in calculating tort damages.  In wrongful death or serious injury cases an element of damages is the loss of future earnings.  Historically and some courts still do not recognize inflation in the calculation of future earnings, which undercompensates plaintiffs.  The lack of consideration for the impact of inflation may result from the history of the present value rule that is used to calculate future earnings. The rule was adopted in 1916 when there was price stability.  But since that time inflation as indicated by the Consumer Price Index has shown a steady increase in inflation.  Some courts do not allow the calculation of inflation because it requires the jury to speculate.  However, the Ninth Circuit determined that the jury is allowed to consider inflation when computing a damage award.  Some courts offer expert testimony to help the jury predict future inflation.

Money illusion may create a false sense of prosperity as demonstrated by “Star Wars: The Force Awakens” in which Americans risk borrowing and spending more money.  But, inflation tells the real story and creates obstacles for multiple aspects of the law.

For further explanation of what happens when the Federal Reserve raises rates, please see “What Happens When the Fed Raises Rates, In One Rube Goldberg Machine.”

*Dianna Shinn is a second year law student at Wake Forest University. She holds a B.A. in English and Political Science from Muhlenberg College in Allentown, PA.